News from and on Japan, March 25 – April 7 2018

School lunches in Japan, Panasonic’s self-search, Japan’s volcano, a new book by Ian Buruma and Shinzo Abe’s new reform bills

Is Japan’s growth stalling? Consumer spending is disappointing and that should be a main driver for growth and a solid inflation. With the risks of a trade war and – as a result – possibly a higher yen (see last paragraph in “Economy” below), it is difficult to state that Japan’s economy is completely out of the woods yet. Then there is the soul searching of quite some Japanese companies, see below Panasonic’s. This and more news from and on Japan where the cherry blossom season just finished.

Politics:

PM Shinzo Abe’s popularity may have edged up to an approval rate of 42%, it will take considerable brinkmanship to secure his position as president of the Liberal Democratic Party LDP. If Abe’s leadership is on the rocks, the next logical question becomes: who might step up to take his place coming September? Who will be the next prime minister of Japan? A couple of the recent polls have asked some early questions about that issue, too; notably, the Asahi Shimbun poll asked who respondents preferred as the next LDP president. 24 percent said Abe, while 22 percent said Shigeru Ishiba; the other options on the poll were former Minister for Foreign Affairs Fumio Kishida (7 percent) and current Minister for Internal Affairs Seiko Noda (5 percent). “None of the Above” outweighed any individual candidate, with 35 percent. Tokyo Review, a collaboration between academics, journalists, and researchers working on issues related to Japanese politics, economics and, society, listed the main contenders, with their pictures. Tokyo Review listed up the potential competitors, see http://www.tokyoreview.net/2018/03/japan-ldp-leadership-race/.

Meanwhile Shinzo Abe is pushing a series of reform bills, including a labor reform bill and a broadcast bill. The labor bill is an answer to karoshi (death by overwork) and consists of three pillars – setting a legal cap on overtime work, ensuring equal treatment for regular and non-regular workers, and exempting skilled professional workers with high wages from working-hour regulations. It sets the legal overtime cap at 100 hours per month and 720 hours per year and stipulates that companies that violate the limits will be punished. The cap will be introduced at major companies in April next year and smaller firms in April 2020. The Abe government got off on the wrong foot when it showed flawed labor data at the introduction of the draft legislation (Japan Today). The Broadcast Law is also to be overhauled – and here are concerns too. “Proponents of revising the Broadcast Law point to the need to unify legal regulations related to broadcasting and Internet streaming. They argue that the proposed changes would stimulate competition by making it easier for companies to enter the broadcasting sector. But others say Abe’s past complaints about what he considered critical reporting of his administration are the motivator for the reform drive.” (Asahi Shimbun.)

For those readers of this News Clipping interested in Japan’s defense spending: The Diplomat, a Japanese online magazine, has a thorough article on the roughly 1% of GDP spending for the military. “Japan has had six consecutive years of increased defense spending. This trend contrasts with consecutive defense budget cuts between 2002 and 2012. (Japan is now back to 2002- levels of spending.)”. The 2018 defense budget is apr. JPY 5 trillion or EUR 38 billion. Japan has also leveraged Official Development Assistance (ODA) to increase its security. The ODA budget has increased considerably and now totals for FY2018 is 553.8 billion yen (EUR 4.2 billion). “Japan’s ODA centers on Southeast Asia. Through its foreign aid, Japan has been able to donate patrol aircraft (retired TC90 trainer aircraft) and multipurpose vessels to the Philippines and used patrol ships to Vietnam. These donations serve at least two purposes – to boost Japanese strategic relations in Southeast Asia, and to help defend the South China Sea against Chinese incursions.”

Economy:

To Japan’s surprise the country was not exempted from extra import levies by the US government, despite’s PM Abe’s friendship with the Donald. Japan exports roughly 2 times more to the USA than it imports from the country, see https://www.census.gov/foreign-trade/balance/c5880.html. But, as the Financial Times states, “Japan plays it cool on response to US steel tariffs. Steelmakers believe their high-grade metal can lead to product-by-product exemptions” … ‘The US steel industry is quite technologically backwards,’ says one official at a large Japanese steelmaker, who argued it would take years for US manufacturers to win customer certification for the speciality steels used in oil and automobiles, even if they invested in technology.” Not much different from the high-quality steel and aluminium products exported by Tata Steel / Hoogovens.

Household spending dropped in February from a year earlier by 0.9%, thus possibly finishing Japan’s longest run of economic expansion since the 1980s with data out on Friday. It suggests that consumption will fail to drive growth if trade frictions undermine exports, writes New York Times. “Japanese households’ confidence on the economy worsened in March for the first time in over a year as they saw themselves worse off due to higher fuel and vegetable prices, a BOJ survey showed on Thursday. Japan’s economy expanded an annualised 1.6 percent in the October-December quarter, marking the eighth straight quarter of gains, on robust global demand and capital spending. But core consumer inflation stood at 1.0 percent in February, well below the BOJ’s 2 percent target, as slow wage growth keeps consumers from increasing their spending.”

“Incredible but true, it is with almost 100 percent certainty that any new crisis or sudden bad news in global markets will force a sharp yen appreciation. This was true for the Brexit shock, the recent trade war fears, North Korean missile tests, Japanese earthquakes – you cannot find a global shock that did not result in an immediate surge in the yen. There is no other asset class in the world that offers as much predictability, which is why the yen is loved by speculators around the world”, writes The Japan Times, in an article by Jesper Koll in which he asks “Why global speculators love the yen.” The most remarkable part of this article is in the last paragraph: “the biggest change required comes from Japan’s financial services industry. Current practices and product offerings are not only limited in choice but come at a very high cost: for the average retail investment fund sold in Japan, the all-in cost for the consumer is almost four times what it is for an American retail investor. So a big reason why Mr. and Mrs. Watanabe (the average consumer – rm) prefer bank deposits over investment trusts comes down to the rational price consciousness of consumers. Make no mistake – Japan’s financial institutions will have to offer more cost-effective investment products to mobilize household savings away from deposits.”

Corporate:

Whoever thought that cross-share holdings by and in Japanese companies is something of the past, is not accurate. Yes, the number of cross share holdings is definitely less than in the ‘90s, but, according to Daisuke Hamaguchi, Chief Investment Officer of Japan Pension Fund Association, “a still large – perhaps 35 per cent – slab of the voting shares of Topix index companies remain quietly in the hands of ‘allegiant’ shareholders who can be relied on never to vote against managements at annual shareholder meetings. Japan’s corporate governance code, introduced in 2015, calls on signatories to perform annual appraisals of the rationale and objectives of their cross-shareholdings, and then provide investors with a formal reason for keeping them.” The Financial Times quotes Travis Lundi of SmartKarma: “They are in effect operating companies with a long-short fund attached that short their own shares and go long the shares of others. A company that chooses to hold these cross-holdings rather than buy back their own shares is effectively asserting they are better at allocating capital than managing their own company, and better at allocating capital than their own shareholders would be,” he said.

When you buy a Ray-Ban, Persol, Armani, Ralph Lauren or Chanel shades there is a fair chance that the glasses and frames are made by Luxottica, the Italian based, stock exchange listed company based in Milan. A similar concentration of glass manufacturing you will see in Sabae, Fukui Prefecture. In a Big Read in the Financial Times the dilemma of “monozukuri” (craftsmanship) vs. automated production is raised. And even more: between family-owned businesses often without successor vs. rationalised, often PE fund back-up companies. And: between “Made in Japan” vs. “Made in China”. According to Kenzo Matsumura, an investment banker turned into entrepreneur, the big lens makers like Hoya and Nikon send production to China or Thailand to save on costs but that misses the point. “If you fully automate a factory, you can be in Japan running that factory more productively and at lower cost than in China,” he says.

In the ’80s one of my favourite books was The Path (Michi wo hiraku) by Panasonic’s Konosuke Matsushita. He founded one of the world’s largest manufacturers of electrical goods, sold under well-known trademarks including Panasonic and Technics. But now Panasonic is in an identity crisis. Why? Panasonic may be known as a manufacturer of consumer electronics but that is for the larger part old news. A major component of its business is battery making for cars like Toyota, VW, Ford and … Tesla. Panasonic has committed up to USD 1.6b billion for building and operating a gigafactory for Teslabatteries and in turn has been granted exclusivity in supplying lithium ion batteries for Tesla’s Model 3. It had expected these costly investments to start to pay off this year but that will now have to wait until Tesla increases production. And that is delayed, also due to the mortal accident with an autonomously driving Tesla last month. On the sidelines of January’s Consumer Electronics Show in Las Vegas, Panasonic President Mr. Kazuhiro Tsuga said: “What kind of a company are we? I keep asking myself that.” And in a speech to new employees this week, Mr. Tsuga again focused on the challenge that awaits them. “When I joined the company a few decades ago, there were things like flat-panel TVs and DVDs that represented the future and it was easier to find a dream. In this age, there is more uncertainty so it’s more important than ever to discover yourselves what you want to do,” he said. “In the next century, we need to build a new Panasonic with our owns hands.” It is the same reality other brands incl. Sony, Hitachi and Toshiba are facing.

Society:

Great story in UK’s paper The Independent: Japan’s mouth watering school lunch program is an example for the world. “Japanese school lunches aren’t synonymous with ‘mystery meat,’ but rather, shokuiku. It means ‘food and nutrition education,’ and it’s a vital part of the Japanese child’s early education. Beginning in elementary school, kids come to understand that what you put into your body matters a great deal in how you think and feel throughout the day – and how you go about your life. As a country, Japan prioritizes school lunch. If parents can’t afford the USD 2.50 cost of a meal, free and reduced lunch programs help kids stay full. ‘Japan’s standpoint is that school lunches are a part of education,’ Masahiro Oji, a government director of school health education, told the Washington Post in 2013, ‘not a break from it.’ Have a look at the pictures of the kids meals!

Is the Ring of Fire becoming more active again? asks Nikkei Review. Well, there is surely reason to think so. Worse for Japan, in a paper published last February, Professor Yoshiyuki Tatsumi of the Kobe Ocean-Bottom Exploration Center at Kobe University, reported the existence of a gigantic lava dome in a Japanese super-volcano, the Kikai caldera – a VEI 8 category potentially 10 times more powerful than the one when the Tambora in 1815 blew off its top. According to Tatsumi, pressure is building up inside the 32-cu.-km offshore lava dome that last erupted some 7,300 years ago. “”If it erupts, it can kill 90 million people in the worst-case scenario.” He predicts 50cm ash layers in Osaka and 20cm in Tokyo if the Kikai dome blows its top.”

So let’s change these gloomy predictions for a better mood and let’s look to literature. Ian Buruma, whom I met in Tokyo late 70’s when we both were active in Japanese theatre, just published his new book A Tokyo Romance, a Memoir about his time in Tokyo. “Buruma was also happy to remain an outsider. There is, after all, a distinct pleasure and freedom that comes with inhabiting those shadowlands where you can acquire the knowledge of an insider, yet never truly belong. In Japan, Buruma finds freedom in creating a life from the outside in, trying on different selves like costumes – documentary film-maker, translator, actor, dancer – to see what works.” (Financial Times.) When Japan’s export drive started in the ‘70s, also movies and theatre attracted much interest in the West. I can assure you that the theatre made by people like Tadashi Suzuki, Terayama Shuji and Kara Juro (“if you can run, don’t walk, if you can shout, don’t speak”) were groundbreaking.